Mr. Strauss said that the downgrade reflects more of a problem among thrifts in general than one specific to Golden West. Even among thrift darlings like Golden West, mortgage price competition and a repricing lag have cut into returns.

Golden West's stock price was down throughout the day, and ended at $35.50, off 12.5 cents.

The mortgage business is unstable because of intense price competition in loan originations as well as a time lag between the repricing of mortgages and a thrift's own increasing costs of borrowing money, said Mr. Strauss.

"Thrifts are originating mortgages with start rates of approximately 4%, even though their own costs are 6%," said Mr. Strauss. Under these conditions, thrifts have been subsidizing their own mortgage loans, Mr. Strauss said.

He lowered earnings estimates for Golden West for 1995 to $3.60 from $4. Other analysts had done the same: Thomas F. Theurkauf Jr., an analyst at Keefe, Bruyette & Woods previously reduced his earnings estimates to $3.80 from $4.20.

Golden West's stock price has been trading at a substantial premium in its price-to-earnings ratio relative to other thrifts. According to Mr. Strauss's earnings projections, Golden West is trading at 9.9 times earnings, while thrifts in general have P/Es of about eight.

The next-highest-trading thrift stock in Mr. Strauss's universe on a price-to-earnings basis is Great Western, which is trading at 9.3 times earnings.

"Because Golden West had established so much good will and has an excellent track record, the market has been willing to give it the benefit of the doubt," said Mr. Strauss.

Partially offsetting margin compression is Golden West's double-digit asset growth, which Mr. Strauss believes is not sustainable. The adjustable-rate mortgage is fueling much of this growth.

Golden West did not have to take a large loan-loss provision in the past few years because it successfully managed its credit quality through the late 1980s. Some other thrifts, however, have been able to increase their earnings by reducing loan-loss provisions.

All thrifts, however, have faced some stressful margin compression realities.

Thrifts use the California cost of funds index, or Cofi, to determine mortgage pricing. The Cofi is a lagging index, giving the institutions that make Cofi-based loans some interest sensitivity.

"In conjunction with the lag, the price war has gotten out of hand this time," said Mr. Strauss. "Many thrifts are doing business very unprofitably."

Mr. Theurkauf added that margin compression affected fourth-quarter earnings for Golden West and other thrifts, and would probably carry over into the first quarter of 1995.

Mr. Strauss said that some thrifts have started to reprice their mortgages, perhaps a first sign of a price war easing.

"Nonetheless, 1995 is not going to be an up year for earnings for a company like Golden West," said Mr. Strauss. The company will continue to build book value, though earnings will probably fall, he said.

In a sign of the market's weakening confidence of acquisition potential, Northeast Federal Corp. stock was fell through the day. It closed at $7.75, down $0.625.

Several banks reported earnings. Among them was Provident Bancorp, which fell $1.25 to $31.75.

Citicorp was among the heaviest-trading bank stocks, falling $1.625 to $38.75.